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Appendix A

EXAMPLE OF VIABILITY ANALYSIS CURRENTLY BEING PERFORMEDBY A MUTUAL LIFE INSURANCE COMPANY

The following description of a planning and projection process constitutes an example ofviability analysis currently being carried out by a large mutual life and health insurancecompany. The numbers in the illustrative reports have been scaled to conceal the identity of thecompany, but are representative of typical results.

At the current time this company does not prepare a formal Viability Report. The process isongoing and communication between the product actuaries and managers that participate in thisactivity and the company’s top management is continual throughout the year. New scenarios arerun on a frequent basis to test the current and future effect of feasible risks and opportunities thathave been identified.

The main focus of this effort is not to demonstrate solvency. This company is very wellcapitalized and projects some level of positive earnings under all feasible scenarios. The focus ison finding the growth patterns and productivity improvements required to achieve competitivelevels of the company’s financial performance measures. The primary measures are GAAPearnings and GAAP ROE. However, the process does produce STAT and GAAP incomestatements, balance sheets and Risk Based Capital amounts for each quarter of the projectionperiod.

After many trial runs, a financial plan is adopted for a new five-year period. The actual resultsfor each quarter are compared to the plan for each product group. The differences and thecorresponding reasons are identified and communicated to the product managers and topmanagement on a quarterly basis. As a result of this analysis the plan may be “returned” andappropriate management action taken. On a somewhat higher level, the results compared to planand the proposed management actions are reported to the Board of Directors.

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LARGE MUTUAL LIFE INSURANCE COMPANYCORPORATE PROJECTION PROCESS

I. OVERVIEW

Large Mutual provides a wide range of insurance products, which are sold through varieddistribution systems. Individual health insurance products sold directly by the parent companyinclude major medical, Medicare supplement, Long Term Care, critical illness, disability, as wellas supplemental health coverage. Through its life insurance subsidiary, the company sellsIndividual Term, Universal Life, Variable Universal Life, Flexible Premium annuities, SinglePremium annuities, and variable annuities. Individual products are sold through captive agents,brokers and direct response marketing. The companies also serve the group insurance marketwith medical, life, LTD, pension and other insurance products.

The Corporate Planning process at Large Mutual currently supports modeling for these variedlines of business as well as incorporating a “Corporate” line. Full SAP and GAAP incomestatements, as well as certain balance sheet entries, are projected over a 7 year period. Scenariosare run to examine results under various production and expense levels. Additionally, results arestress tested to examine the effects of experience changes or interest rate changes.

The results of these scenarios are then used to:

a. Set Corporate and product line profitability goals,b. Examine expected cash flow for investment purposes,c. Set strategic goals for the future growth and viability of the business. E.g. expense/

production levels needed to grow to a 12.5% R.O.E.,d. Examine expected tax status of the companies(life versus P&C insurer) based on reserve test

II. PRODUCT PROFITABILITY MODELS

Product profit models are built in various areas throughout the companies, using various systems.These may include packages such as PTS or TAS for life and annuity products or Excel forgroup and individual major medical. All of the base models share certain characteristics.

First, a common set of interest rate assumptions is used. Second, initial runs are performed usingcurrent best estimate assumptions. These may vary from original pricing. Third, all modelsproduce the usual income statement and balance sheet entries along with key statistics used forexpense projection purposes These include in-force counts, premium, sales levels, claim countsetc. Expense units are determined for each line based on the current level of expenses orexpected budgeted expenses.

In-force models are built separately from new business models for each product line. NewBusiness models are built assuming 1 million dollars of annualized new business premium(ANBP). After the models are built and validated, cash flow as well as income statement andbalance sheet entries for the in-force and new business models are passed separately to theCorporate planning area for development of the first pass corporate projection.

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III. DEVELOPING THE FIRST PASS CORPORATE PROJECTION

Given an in force model and a million dollar ANBP new business model, it is a simple task togenerate a projection based on a given ANBP target for the next 7 years. For example supposethe premium entries are as follows for a given line:

Year 1 Year 2 Year 3 Year 4In force 190M 185M 177M 165MNB (1M ANBP) 0.65M 0.9M 0.8M 0.7M

If production is assumed to be 10M, 12M, 15M and 20M in years 1 through 4 respectively, thenthe total premium expected in year 4 is given as 165M + (.7M * 10) + (.8M * 12) + (.9M * 15)+ (.65M * 20).

This process is a simple programming task and is only restricted by the number of years of dataprovided by the respective models. Additionally, the process can be performed for each entry toprovide income statement, balance sheet entries, as well as expense drivers for a given set ofproduction scenarios across all of the various lines of business in a timely manner. As anexample, projecting 65 distinct lines of business full SAP and GAAP entries takes under 5minutes, using a visual basic program which is not focused on efficiency.

Expense units can be added to the process to also allow for changes in expense levelassumptions. Included in this variation are assumptions used to take into account step-variablenature of certain expenses using a linear approximation , as well as reflecting the impact ofchanges in deferred expenses on resulting GAAP amortization for a given issue year.

Changes in amortization can be modeled by introducing a variable which records the base levelof deferred expenses assumed in the 1 million dollar ANBP model. Should the deferred expensesincrease due to ANBP growth alone, then the resulting issue year’s amortization of DAC issimply the base model’s amortization ratio by ANBP as described above for premium. If there isalso a change in the assumed level of expenses, then amortization needs to be additionallychanged to reflect the increase in deferrals over and above volume changes. If, for example, thebase deferred expense level doubles, prior to volume increases then the base model needs toamortize at twice the rate. These calculations are all performed at the individual product level.

When complete, a process is in place, which allows for a quick turnaround of various ANBP andexpense unit level scenarios for the entire Company, under assumed interest rate, mortality,morbidity assumptions.

If, for example, interest rate scenarios are desired, additional runs of the base models are needed.These can be defined up front, and the resulting data flows can be saved as alternate scenarios tobe calculated through the same process described above.

Mortality and morbidity scenarios are typically treated as sensitivity runs to determine somewhat-ifs. An example is the case of what if mortality increases x%? These runs are typically

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treated as another scenario to be run through the base models and entered as another scenario inthe corporate planning process described above.

IV. TYPICAL SCENARIOS

Typically scenarios which are run focus on variants of the following:

1. Production growth/ distribution and expenses based on historical trend.2. More growth in Products of type X versus type Y, with expenses at current levels.3. Grading expenses to “allowable” or pricing levels over 5 years.4. Production growth needed to obtain critical mass.5. Increase in morbidity, mortality or lapse rates.6. Changes in interest rate levels.

Following are example reports from two scenarios varying ANBP and expenses.

Baseline: ANBP distribution based on prior year results. Growth determined by Sales andMarketing. Expense levels are at current Budgeted levels by product.

Scenario 2: ANBP distribution assumes flat medical product sales and increases in individual life/ annuity.

Expense assumptions assumes individual products reach allowable expenses over 7 years.

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Run STATUTORY FINANCIAL REPORTING Scenario 2 ANBP SHIFT to Life/Annuity Appendix A 2999 0 Indiv. Product Expenses to allowable

0.0005PROJ98 PROJ99 PROJ00 PROJ01 PROJ02 PROJ03 PROJ04 PROJ05 TERM LIFE AGENCY

ANBP 774 895 1,133 1,364 1,492 1,632 1,787 1,956 TRAD LIFE AGENCYINTEREST-SENS LIFE AGENCY

Premium 1,881 1,960 2,353 2,610 2,831 3,079 3,351 3,651 VUL AGENCYInv. Income 311 316 327 345 368 396 428 462 TERM LIFE DRMOther Income 35 44 55 68 72 76 82 87 TRAD LIFE DRMTotal 2,227 2,320 2,735 3,023 3,271 3,551 3,860 4,200 TERM LIFE BROKER

INTEREST-SENS LIFE BROKERVUL BROKER

Benefits/Claims 1,549 1,531 1,840 1,966 2,110 2,292 2,478 2,695 DEFER FIXED ANN-AGENCYResv Increase 101 87 114 171 210 247 295 333 DEFER FIXED ANN-COPELANDCommission(w/out Agent Fin) 99 112 131 156 171 186 202 221 DEFER FIXED ANN-BANKAgent Fin 4 4 5 5 5 6 6 7 IMMEDIATE FIXED ANNUITY-AGCYExpense s 341 353 374 401 428 450 470 494 IMMEDIATE FIXED ANNUITY-BROKEROther Expenses/Ptaxes 20 20 21 23 25 27 30 32 STRUCTURED SETTLEMENTSIncr in Loading 2 2 2 2 2 4 5 5 VARIABLE ANNUITY - AGENCYTransfer to sept. Acct 59 131 158 195 202 198 203 214 VARIABLE ANNUITY - BROKERTotal 2,173 2,240 2,644 2,918 3,154 3,410 3,690 4,000 PPO-INDEMNITY-AGENCY

MED SUPP - AGENCYHOSPITAL MEDICAL - AGENCY

Pre-Tax Operating Gain 54 81 91 105 117 141 170 200 DISABILITY INCOME - AGENCYACCIDENT ONLY-AGENCY

Before Expenses/Taxes/Ag Fin 418 458 491 534 575 625 677 733 LONG TERM CARE - AGENCYSUPPLEMENTAL HLTH-AGENCY

Before Expenses/Taxes 414 453 486 529 570 619 670 726 PPO-INDEMNITY-DRMMED SUPP - DRMDISABILITY INC - DRM

Expense / Premium 18.10% 17.99% 15.89% 15.37% 15.11% 14.62% 14.04% 13.53% ACCIDENT ONLY - DRMCommiss/ Premium 5.48% 5.92% 5.78% 6.17% 6.24% 6.24% 6.23% 6.23% LONG TERM CARE - DRM

SUPPLEMENTAL HEALTH - DRMLoss Ratio (w/ Chng in resv) 87.68% 82.56% 83.02% 81.85% 81.95% 82.47% 82.77% 82.94% PPO-INDEMNITY-ACQUIS

MED SUPP - ACQUISStat Resv+Sep Accts 5,199 5,418 5,668 5,996 6,519 6,982 7,570 8,223 HOSPITAL MED - ACQUISStat Target Surplus 383 394 414 442 473 508 548 594 DISABILITY INCOME - ACQUIS

ACCIDENT ONLY - ACQUISStat TS/RBC Factor LONG TERM CARE - ACQUISProjected RBC 232 239 251 268 287 308 332 360 SUPPLEMENTAL HEALTH - ACQUIS

PPO-INDEMNITY-BROKERACCIDENT ONLY-BROKERMED SUPP - BROKERSMED SUPP - MANUFACTSPECIAL RISK

4/24/00 3:24 PM X:\CMODEL\Lance\[Scenario_reporterO.xls]reports DISABILITY INCOME - BROKER

IMMEDIATE FIXED ANNUITY-AGCYIMMEDIATE FIXED ANNUITY-BROKER

SUPPLEMENTAL HLTH-AGENCY

SUPPLEMENTAL HEALTH - DRM

SUPPLEMENTAL HEALTH - ACQUIS

Appendix B

POSSIBLE APPROACH TO VIABILITY STUDY

THE ATTACHED NUMBERS HAVE BEEN CAMOUFLAGED SOMEWHAT, BUTSTILL REPRESENT ONE SMALL COMPANY’S APPROACH.

EACH YEAR, GAAP AND STATUTORY EARNINGS ARE PROJECTED FOR THENEXT TWO YEARS. THE PRESIDENT, EXECUTIVE VICE PRESIDENT ANDCHIEF ACTUARY, AND SENIOR VICE PRESIDENT AND CONTROLLER MEETTO DISCUSS THESE PROJECTIONS. THESE ARE THE THREE TOP COMPANYOFFICERS AND MEMBERS OF THE BOARD OF DIRECTORS. THEIR MEETINGAGENDA INVOLVES ASKING QUESTIONS OF EACH OTHER OF A DEVIL’SADVOCATE SORT, TO MAKE SURE THE PROJECTIONS STAND UP.

OUTSIDE DIRECTORS MAY ASK QUESTIONS ABOUT THE PROJECTIONS, BUTRELY HEAVILY ON OUR MANAGEMENT.

QUESTIONS INCLUDE:

1. CAN THE INDIVIDUAL MARKETING DEPARTMENT ACHIEVE NEWPREMIUM GOALS? THESE INCLUDE GROWTH IN LONG-TERM CARE,WORKSITE UNIVERSAL LIFE, AND TERM LIFE WITH MULTIPLEUNDERWRITING CLASSES.

2. CAN PRODUCTION INCREASES COME FROM NEW GENERAL AGENCYDISTRIBUTION OUTLETS IN HAWAII, ARIZONA, NEVADA, TEXAS,AND GEORGIA?

3. CAN OUR BRANCH OFFICE AGENTS SELL THE COMPETITIVE TERMWE HAVE DESIGNED?

4. IS OUR LONG-TERM CARE REINSURANCE FOR LONG NURSING HOMESTAYS IN PLACE? IS OUR REINSURER SATISFIED?

5. WILL THIS NEW PRODUCTION LEAVE OUR RISK BASED CAPITALRATIOS STILL VERY HIGH?

6. CAN OUR TWO INVESTMENT ADVISERS MEET THEIR INTERESTGOALS AND KEEP OUR ASSETS EVEN BETTER MATCHED WITHLIABILITIES THAN CURRENTLY?

7. CAN WE CONTINUE TO AVOID PAYING SHAREHOLDER DIVIDENDS?IF WE PAY, HOW MUCH INVESTMENT INCOME WILL BE LOST?

8. CAN SIGNIFICANT NEW LIFE PRODUCTION COME FROM EMPLOYER-SPONSORED SOLICITATIONS OF EMPLOYEES AT LOCAL TEXTILEFIRMS?

9. CAN GROUP LIFE AND SHORT-TERM DISABILITY PREMIUMSCONTINUE TO GROW DESPITE COMPETITIVE PRESSURES?

10. CAN ASO FEES CONTINUE TO GROW WITH OUR NEW SYSTEM? AREWE STILL PROVIDING UNIQUE CASE MANAGEMENT SERVICES?

11. CAN OUR INDIVIDUAL CONVERSION TO A REAL TIMEADMINISTRATIVE SYSTEM PRODUCE THE EXPENSE SAVINGSPROJECTED? WILL THIS ALLOW OTHER EXPENSES TO CONTINUE TOREDUCE?

12. WILL OUR RATE INCREASES ON ASSUMED BLOCKS OF HEALTHINSURANCE PROVIDE THE DESIRED REDUCTIONS IN LOSS RATIOS?

13. ARE SALARY LEVELS STILL COMPETITIVE WITH THE ATLANTA-CHARLOTTE CORRIDOR?

SMALL COMPANY PROJECTED STATUTORY NET INCOME 2000 (000's) Appendix B 2

Health Health Total Life Life Total Health Life Credit Group/<=99 2000 Health <=99 2000 Life Assumed Assumed OB ASO ANN Corporate Expense Total

------------------ ------------------ ------------------ ------------------ ------------------ ------------------ ------------------ ------------------ ------------------ ------------------ ------------------ ------------------ ------------------ ------------------Premiums 12,697 3,412 16,109 30,193 15,362 45,555 8,966 5,886 600 10,988 88,104Fees 0 0 700 14,334 384 15,418Inv Income 2,081 (14) 2,067 7,894 242 8,136 2,001 7,215 1,389 5,587 26,395

------------------ ------------------ ------------------ ------------------ ------------------ ------------------ ------------------ ------------------ ------------------ ------------------ ------------------ ------------------ ------------------ ------------------Subtotal 14,778 3,398 18,176 38,087 15,604 53,691 11,667 13,101 600 25,322 1,389 5,971 0 129,917

Benefits 5,574 505 6,079 16,239 6,717 22,956 7,020 7,575 700 9,756 90 54,176Surrenders 0 3,536 9 3,545 1,289 4,834Oth Benefits 0 1,480 3 1,483 1,483Oth Acquisition 1,451 1,451 1,666 1,666 3,117Oth Maintenance 1,412 1,412 4,300 4,300 5,712Commissions 1,065 1,996 3,061 3,740 6,906 10,646 8 6,336 (2,353) 17,698Exp Taxes 1,977 1,205 3,182 2,041 1,611 3,652 1,011 515 100 16,919 520 25,899Res Increase 1,530 299 1,829 3,611 1,100 4,711 (3,608) (4,342) (1,410)Net Amort 0 0 0Reduced Exps 0 0 (2,000) (2,000)

------------------ ------------------ ------------------ ------------------ ------------------ ------------------ ------------------ ------------------ ------------------ ------------------ ------------------ ------------------ ------------------ ------------------Subtotal 11,558 5,456 17,014 34,947 18,012 52,959 4,431 10,084 800 24,322 1,289 610 (2,000) 109,509

Net Income 3,220 (2,058) 1,162 3,140 (2,408) 732 7,236 3,017 (200) 1,000 100 5,361 2,000 20,408

Note: Total Exps 32,728

PAGE 1

SMALL COMPANY PROJECTED STATUTORY NET INCOME 2001 (000's)

Health Health Total Life Life Total Health Life Credit Group/<=99 2000 Health <=99 2000 Life Assumed Assumed OB ASO ANN Corporate Expense Total

------------------ ------------------ ------------------ ------------------ ------------------ ------------------ ------------------ ------------------ ------------------ ------------------ ------------------ ------------------ ------------------ ------------------Premiums 11,239 6,333 17,572 26,549 29,290 55,839 7,621 5,395 11,988 98,415Fees 0 0 400 15,334 384 16,118Inv Income 2,017 8 2,025 8,057 720 8,777 1,728 6,905 1,489 6,629 27,553

------------------ ------------------ ------------------ ------------------ ------------------ ------------------ ------------------ ------------------ ------------------ ------------------ ------------------ ------------------ ------------------ ------------------Subtotal 13,256 6,341 19,597 34,606 30,010 64,616 9,749 12,300 0 27,322 1,489 7,013 0 142,086

Benefits 5,716 1,017 6,733 15,024 13,174 28,198 6,925 7,263 10,256 90 59,465Surrenders 0 3,557 57 3,614 1,289 4,903Oth Benefits 0 1,536 12 1,548 1,548Oth Acquisition 1,089 1,089 1,249 1,249 2,338Oth Maintenance 1,059 1,059 3,225 3,225 4,284Commissions 872 3,044 3,916 3,068 11,102 14,170 4 6,057 (1,853) 22,294Exp Taxes 1,805 1,904 3,709 1,785 2,796 4,581 907 469 16,919 520 27,105Res Increase 582 913 1,495 2,726 3,686 6,412 (1,869) (3,785) 2,253Net Amort 0 0 0Reduced Exps 0 0 (3,500) (3,500)

------------------ ------------------ ------------------ ------------------ ------------------ ------------------ ------------------ ------------------ ------------------ ------------------ ------------------ ------------------ ------------------ ------------------Subtotal 10,034 7,967 18,001 30,921 32,076 62,997 5,967 10,004 0 25,322 1,289 610 (3,500) 120,690

Net Income 3,222 (1,626) 1,596 3,685 (2,066) 1,619 3,782 2,296 0 2,000 200 6,403 3,500 21,396

Note: Total Exps 30,227

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SMALL COMPANY PROJECTED GAAP NET INCOME 2000 (000's)

Health Health Total Life Life Total Health Life Credit Group/<=99 2000 Health <=99 2000 Life Assumed Assumed OB ASO ANN Corporate Expense Total

------------------ ------------------ ------------------ ------------------ ------------------ ------------------ ------------------ ------------------ ------------------ ------------------ ------------------ ------------------ ------------------ ------------------Premiums 12,697 3,412 16,109 30,193 15,362 45,555 8,966 5,886 600 10,988 88,104Fees 0 0 700 14,334 384 15,418Inv Income 1,342 (73) 1,269 6,229 129 6,358 2,001 7,215 1,389 8,163 26,395

------------------ ------------------ ------------------ ------------------ ------------------ ------------------ ------------------ ------------------ ------------------ ------------------ ------------------ ------------------ ------------------ ------------------Subtotal 14,039 3,339 17,378 36,422 15,491 51,913 11,667 13,101 600 25,322 1,389 8,547 0 129,917

Benefits 5,574 505 6,079 16,239 6,717 22,956 7,020 7,575 700 9,756 90 54,176Surrenders 0 3,536 9 3,545 1,289 4,834Oth Benefits 0 1,480 3 1,483 1,483Oth Acquisition 1,451 1,451 1,666 1,666 3,117Oth Maintenance 1,412 1,412 4,300 4,300 5,712Commissions 1,065 1,996 3,061 3,740 6,906 10,646 8 6,336 (2,353) 17,698Exp Taxes 1,977 1,205 3,182 2,041 1,611 3,652 1,011 515 100 16,919 520 25,899Res Increase 876 1,157 2,033 2,063 3,732 5,795 (3,608) (4,342) (122)Net Amort 1,400 (3,250) (1,850) 2,460 (5,968) (3,508) 1,472 1,693 (2,193)Reduced Exps 0 0 (2,000) (2,000)

------------------ ------------------ ------------------ ------------------ ------------------ ------------------ ------------------ ------------------ ------------------ ------------------ ------------------ ------------------ ------------------ ------------------Subtotal 12,304 3,064 15,368 35,859 14,676 50,535 5,903 11,777 800 24,322 1,289 610 (2,000) 108,604

Net Income 1,735 275 2,010 563 815 1,378 5,764 1,324 (200) 1,000 100 7,937 2,000 21,313

Note: Total Exps 32,728

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SMALL COMPANY PROJECTED GAAP NET INCOME 2001 (000's)

Health Health Total Life Life Total Health Life Credit Group/<=99 2000 Health <=99 2000 Life Assumed Assumed OB ASO ANN Corporate Expense Total

------------------ ------------------ ------------------ ------------------ ------------------ ------------------ ------------------ ------------------ ------------------ ------------------ ------------------ ------------------ ------------------ ------------------Premiums 11,239 6,333 17,572 26,549 29,290 55,839 7,621 5,395 11,988 98,415Fees 0 0 400 15,334 384 16,118Inv Income 1,364 (145) 1,219 6,504 426 6,930 1,728 6,905 1,489 9,282 27,553

------------------ ------------------ ------------------ ------------------ ------------------ ------------------ ------------------ ------------------ ------------------ ------------------ ------------------ ------------------ ------------------ ------------------Subtotal 12,603 6,188 18,791 33,053 29,716 62,769 9,749 12,300 0 27,322 1,489 9,666 0 142,086

Benefits 5,716 1,017 6,733 15,024 13,174 28,198 6,925 7,263 10,256 90 59,465Surrenders 0 3,557 57 3,614 1,289 4,903Oth Benefits 0 1,536 12 1,548 1,548Oth Acquisition 1,089 1,089 1,249 1,249 2,338Oth Maintenance 1,059 1,059 3,225 3,225 4,284Commissions 872 3,044 3,916 3,068 11,102 14,170 4 6,057 (1,853) 22,294Exp Taxes 1,805 1,904 3,709 1,785 2,796 4,581 907 469 16,919 520 27,105Res Increase 7 2,088 2,095 1,385 6,947 8,332 (1,869) (3,785) 4,773Net Amort 1,258 (3,512) (2,254) 2,344 (7,256) (4,912) 1,212 1,454 (4,500)Reduced Exps 0 0 (3,500) (3,500)

------------------ ------------------ ------------------ ------------------ ------------------ ------------------ ------------------ ------------------ ------------------ ------------------ ------------------ ------------------ ------------------ ------------------Subtotal 10,717 5,630 16,347 31,924 28,081 60,005 7,179 11,458 0 25,322 1,289 610 (3,500) 118,710

Net Income 1,886 558 2,444 1,129 1,635 2,764 2,570 842 0 2,000 200 9,056 3,500 23,376

Note: Total Exps 30,227

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5/2/00

Appendix C

VIABILITY ANALYSISFraternal Organization

OVERVIEW

Objective

To assure that the company will have sufficient surplus, now and into the future,to deliver on contractual obligations, to provide reasonable protection from risk,and to provide working capital to enable continued growth of the organization.

Scope

Viability analysis will cover the entire enterprise, including the fraternal benefitsociety and all of its subsidiaries and affiliates. The organization’s approach tofinancial management is to view the organization as a single business enterprisecomprised of many legal entities. We comply with legal and businessrequirements entity by entity, but we focus on performance of the enterprise as awhole. We view capital as being fully mobile across the enterprise, except asmay be limited by legal requirements applicable to specific entities.

Responsibility

The Appointed Actuary will have primary responsibility and accountability forviability analysis. Significant support and assistance will be required from others,including product actuaries, investment personnel, and financial managers ofsubsidiaries.

Uses

1. Understand the association’s risk profile and risk appetite. Results shoulddemonstrate the ability and resiliency to withstand a broad range of potentialvariances, through sufficiency of available surplus, ability to alter strategy,and/or adoption of hedging strategies. Accomplished through acomprehensive annual viability study and report which includes stress tests ofall assumptions significant to success of the business plan.

2. Support decision-making and development of the association’s business plan.Accomplished by incorporating proposed plans, initiatives, and decisions intoa selected subset of scenarios from the annual study.

3. Understanding the financial impact of disruption of basic components of thebusiness plan.

Viability Analysis, page 2

4. OUTLINE OF VIABILITY ANALYSIS REPORT

Executive Summary

A brief summary of key findings and conclusions, plus recommendations as maybe appropriate.

Business Plan

A summary of key elements of the association’s business plan, focussing onbusiness decisions that directly affect viability results.

• Development or expansion of a marketing channel• Marketing initiatives• Start-up of a new subsidiary• Introduction of new benefits• Withdrawal from existing products• New initiatives

Business Assumptions

Identification of assumptions that are controlled by management and areembedded in the projections supporting the viability analysis. Some of thesemay be singular assumptions; others may be a range of assumptions to betested via multiple scenarios.

• Productivity of distribution channels• Hiring & retention of career agents• Product pricing profitability targets (or margins, spreads, etc.)• Commissions and compensation• Expense assumptions

Environmental/Economic Assumptions

Identification of assumptions that cannot be controlled by management. Theseare generally incorporated into the analysis via stochastic simulation; sensitivitytesting via multiple scenarios may also be used.

• Interest rates• Equity market changes• Mortality and morbidity rates

Viability Analysis, page 3

Business Continuity Assumptions

Identification of basic components of business operations implicit in the goingbusiness assumption of the business plan. These are incorporated into theanalysis on a momentum basis; with accompanying analyses of impact ofdisruption from the momentum assumption.

• Tax status of benefit structures• Lutheran structure• Failure of organization brand value• Longevity of life span

Results

A summarized display of numerical and graphical results from the projectionscomprising the analysis. This section will include results for several key financialmeasures, such as the following:

1. Surplus (GAAP, Statutory Accounting) and economic value added. This isthe most important indicator, as it relates to financial strength and to capacityfor future growth. Total surplus to be identified as:

• Surplus committed to existing business• Surplus committed to business plan initiatives• Uncommitted available surplus

2. Annual income (GAAP and Statutory Accounting). This is important as itrelates to continuity of operations and to external perceptions.

3. Margins available for indirect and overhead expenses. Important as it relatesto management of the company infrastructure.

4. Total annual revenue by source. An indicator of growth.

5. Total assets under management. An indicator of growth.

“S-curve” displays will be used to display variations due to stochastic variables.Individual scenarios with extreme or adverse results will be reviewed to identifycauses of such results. Line or bar graphs will be used to illustrate dispersion ofresults caused by variations of other variables.

A compilation of low frequency exposures and the impact of adverse experience,especially high risk exposures.

Viability Analysis, page 4

Conclusions

This section will contain conclusions from the analysis, together with rationale forarriving at the conclusions. Conclusions will address:

1. With respect to the business plan assumptions:

• Overall assessment of viability of the business plan• Identification of threats to viability, including assessment of likelihood and

recommendations, if appropriate• Assessment of business plan alternatives (if any)

2. With respect to business plan components and the long-term going businessassumption:

• Analysis of effect of disruptions in plan components• Impact of low frequency environmental exposures

Appendix D

Top Ten Risk Management Areas of Concern

For Financial Services

1. Capital Management

Definition of and Corporate Constraints on Capital- Internal- Rating Agencies- Allocation of Capital by Line of Business

Relationship of Capital to RiskMeasurement of CapitalMeasurement of Risk

- Experience Studies – decrements, expense- DFA- Growth Expectations- Definition of Risk

Value – of business/corporation

2. Credit Risk Management

Credit Quality of Portfolio(s)- Current- Prospective- Spread Management for Spread-Gain Products

Development of a Company/Portfolio Investment Policy Internal Controls on - who is investing, how they are investing, investment activity Default Experience Forecasting

3. Foreign Exchange Risk Management

Comparison of Assets and Liabilities by Currency – Absolute AmountsIncidence of Anticipated Cash FlowsHedgingRegulations on Capital Flows in Foreign CountriesRepatriation of Foreign Investments

4. Securities Portfolio Management

Monitoring and financial review of all counterpartiesVariation of strategies by type of portfolio – separate vs general accountsReview of market strategies in light of current conditionsComparison of portfolio performance against relevant benchmarksComparison of portfolio management against investment policy guidelinesAccounting controls

5. Real Estate Appraisal

Maintenance of an up-to-date assessment of real estate values of holdingsReview of administrative and accounting procedures in light of financial performanceLiquidity risk assessment

6. Product Design and Pricing Management

Monitor product competitiveness - features compared to those of selected relevant competitors - prices/rates/guarantees compared to those of relevant competitors

Documentation of actual pricing and re-pricing testing and procedures- Does pricing/re-pricing meet corporate RoE/NOI goals- Use of DFA techniques

Prepare a business plan based on pricing to be the expected basis against which to compare experience items

Risks to products posed by regulatory or market action Examine effect of extremes on results

7. Underwriting and Liability Management

Training in new compliance/underwriting/claims regulations and proceduresRelated items such as complaints, fraud, agent negligenceAudit and review of retention levelsAudit results by claim examiner and underwriterReview any special underwritingReview claims for trends and pricing implicationsReinsurance policy

- implications on pricing- implications on capital requirements- implications on risk exposure

8. Interest Rate Risk Management

Review of target durations/key rate durations/convexity for underlying liability elements and capitalSimilar review re assets by portfolioHedging strategies – residual risk after hedging, relative to corporate capital and surplus levelsUse of derivatives to offset product risks

9. Liquidity Management

Projection of future benefit flows for current book – DFA approachesCash flow testing – DFA approachesProject policyholder obligations, expenses, and capital requirements over several selected future periodsPrepare a 1-3 year projection of expected asset and liability flows by month, and comparePrepare a Strategic Plan over a longer horizonAssessment of run-on-the-bank scenarios

- How much of the portfolio is considered liquid – potential losses if liquidation of assets required quickly- For investment products, any surrender an important deterrent to early surrender, but not in extreme cases under extreme run-on-the-bank scenarios

10. Internal Control

Personnel, hiring/terminationCompensation/benefitsAuditing policies and proceduresOrganization – responsibilities, authoritiesLicensing and appointment – operations, field, security dealingMarket conductDue Diligence – merger, acquisition, JV

11. Uncontrolled

Politics – state/national/internationalPublic concerns – trends in issues in which public is interestedRegulation/legislation - in effect and proposed

Three T’s of Risk ManagementFor Financial Institutions

A. TERMS

• Risk – definition, measurement, corporate/business tolerance, correlations, volatility and ruin, EPD/VaR/CER• Capital – definition, relationship to risk, profitability measurement, relationship to ratings, allocation by business,

optimization, operational/credit/market(/insurance)• Value – definition, corporate/business, relationship to capital, purpose

B. TOOLS

• ALM – cash flow, duration, key rate duration, convexity• DFA – cash flow testing, projection, UVS, risk• Audit – regular, pricing/procedures analysis• Experience Analysis – decrements, default, expense, investment benchmarks• Analysis of selected scenarios – run-on-the-bank, extreme loss, stress testing• Optimization techniques – risks/capital• Volatility analysis – by business, ruin• Identification and analysis of correlations – may have to be estimated ie incomplete data• Risk adjusted return on capital techniques – primarily in banking• Distribution and parameter estimation - may have to be estimated ie incomplete data

C. TACTICS

• Matching – cash flow, duration/key rate durations, convexity• Volatility goals – corporate/business, ruin probilities• Hedging – derivatives, caps/floors, currency, etc• Investment policy by portfolio purpose – credit quality, liquidity, composition, turnover• Claim/underwriting review – distributions, A/E experience• Monitoring of competition – pricing, product, performance• On-going review of new legislation/regulation – investment, product, market conduct, employment, tax• Corporate goals – risk tolerance, RoE, NOI, sales, etc• Product design/pricing review• Planning – long and short term• Procedures and controls – all areas• Reinsurance – reinsurance, coinsurance, mod-co, co-mod-co, etc; effect on risk/profitability• Sales strategy/markets – changes to meet goals, sources of profitability• Ratings – comparison with market to derive capital requirement

Credit Risk

A. What is the credit risk?

1. probability of default of the assets;

2. probability of downgrades by rating agencies

3. probability of widening spreads

B. How to measure the credit risk?

1. RBC factors (C1) and RBC ratios

2. historical default rates: industry studies and company’s own experience

3. how is your company’s asset portfolio classified : (a) hold to maturity; (b) available for sale; (c) tradingaccount;

C. How to manage the credit risk?

1. define asset allocation by quality and maturity;

2. monitor the relative performance of each asset class - poor performance of high yield bonds could implyeconomic slow down or recession;

3. establish a stochastic model to calculate the VAR with respect to credit risk only

D. Example of Executive Life (1990):

1. about 50% of their asset portfolio was in high yield bonds, and the market collapsed at the beginning of therecession;

2. the company surplus fell below the statutory minimum and the State of California took over

3. the company assets were liquidated at depressed prices to pay for all the claims and policies, although thejunk bond market rebounded sharply in 1991 and 1992.

Interest rate risk

A. What is the interest rate risk?

1. mismatch of asset/liability cash flows, market values and duration/convexity

2. the prepayment of interest rate sensitive assets (CMOs and mortgages)

3. the capital losses/gains from the unexpected liquidation of assets

B. How to measure the interest rate risk?

1. RBC factors (C3) and RBC ratios

2. for cash flow testing, use dynamic models for the interest rate sensitive parameters, such as lapse rates forannuities and UL

3. in addition to the NY7 scenarios, generate multiple stochastic economic scenarios to stress test theoutcomes

C. How to manage the interest rate risk?

1. define the investment strategies when designing new products (life, LTC, annuities)

2. for the interest rate sensitive products, such as GICs and fixed annuities, calculate the key rate durations forboth assets and liabilities, and define the risk tolerance for the differences between the key rate duration.

3. use interest rate derivatives (such as caps) to hedge some of the interest rate risk.

D. Examples:

1. in Japan during 1990’s, the guaranteed minimal interest rates on policies are often higher than the interestrates on the domestic corporate bonds

2. in U.S. before 1970’s, the interest rates for policy loans were often fixed around 5%, and the policy loansskyrocketed around 1980 when the prime rate reached 20%.